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Friday, December 17, 2004

When Bad Things Happen to Good Projects

CIO magazine does a root cause analysis of HP ERP rollout failure. Excerpts:

IT GOES AGAINST human nature to always expect the worst. But with IT projects, pessimism—otherwise known as contingency planning—is the only way to keep small technology problems from becoming full-blown business disasters.Hanger, HP's senior vice president of Americas operations and IT, had an unbroken record of success migrating five product groups within the two former companies onto one of two SAP systems. Hanger had every reason to believe that the sixth would go well too. Even so, she knew to be prepared for problems. At approximately $7.5 billion in annual revenue, the division involved with this latest project, Industry Standard Servers (ISS), is much larger than any of the others that Hanger had migrated to SAP to that point. So Hanger took the contingency plan that her team had developed for the other five migrations and adjusted it to accommodate the ISS division's larger sales volume. She planned for three weeks of IT snafus, mostly focused on what might happen as a result of tweaking a legacy order-entry system to work with the new SAP system. But the plan wasn't pessimistic enough.

Starting when the system went live at the beginning of June and continuing throughout the rest of the month, as many as 20 percent of customer orders for servers stopped dead in their tracks between the legacy order-entry system and the SAP system. As IT problems go, this wasn't too big: Some data modeling issues between the legacy system and the SAP system prevented the SAP system from processing some orders for customized products. These programming errors were fixed within four or five weeks. But Hanger and her business colleagues from the ISS division who were on the project steering committee never envisioned the degree to which these programming glitches would affect the business. Orders began to backlog quickly and HP did not have enough manual workarounds to keep servers flowing fast enough to meet customer demand. Angry customers picked up the phone and called HP—or worse, arch-competitors Dell and IBM. In a commodity market such as servers, customer loyalty is built upon a company's ability to configure products to order and get them delivered on time. HP could do neither for much of the summer. In a third-quarter conference call on Aug. 12, HP Chairman and CEO Carly Fiorina pegged the financial impact at $160 million: a $120 million order backlog that resulted in $40 million in lost revenue. That's more than the cost of the project itself, which AMR Research estimates to be $30 million.

The headlines all claimed an IT disaster, but in fact, HP's disaster resulted from a few relatively small problems in IT that snowballed into a much bigger problem for the business: the inability to cope with the order backlog.This was a disaster that could have been prevented—not by trying to eliminate every possibility for error in a major IT system migration, which is virtually impossible, but by taking a much broader view of the impact that these projects can have on a company's supply chain. CIOs don't run the supply chain in most companies, so they have trouble envisioning what will happen to sales if a critical system doesn't function as expected for a few days or weeks. Businesspeople, meanwhile, have trouble imagining an IT programming glitch getting past the walls of the data center and causing hundreds of millions of dollars' worth of lost sales. The chasm between cause and effect is almost too vast to contemplate. But if CIOs want to stop being held liable for hundreds of millions of dollars in losses for relatively small IT problems, they have to convince business leaders of the vastly increased risks that major enterprise software projects pose to businesses with high-volume supply chains. They must use that awareness to build—with full support and cooperation from the business—a business contingency plan for IT projects that is as robust as the project plans they create for the new software.

In both Nike's and HP's cases, the IT problems were due to a combination of factors that would have been difficult to eliminate in the project-planning process. At HP, Hanger says her team tested the connections between the legacy front-end ordering system and the SAP system. And the connections worked fine for orders that did not involve any custom configuration, as well as for some custom orders. One message that needs to be communicated more strongly within HP—and within every company these days, Bouchard believes—is the message that is implicit in his dual role: "There is big leverage between IT and the business processes when you deal with a large supply chain," he says. "Just looking at contingency planning from an IT point of view would be a big mistake. It has to be looked at from an integrated view of IT processes and the business.
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